gary-weiss.com

Author of three books. This blog not very active so follow on Twitter: @gary_weiss

Thursday, January 29, 2004

AN INVESTOR TALKS BACK TO THE BALONEY BRIGADE:Here is the dialogue that I mentioned in my January 29, 2006 post. Since Blogspot has no method of attaching files, I've date-stamped this exchange to make it appear at the very bottom of the blog, as a kind of footnote.

This is an exchange between a Yahoo user, apparently an ordinary investor with some legal expertise, and the bravely pseudonymous "Bob O'Brien," an ex-used medical equipment peddler named Phil Saunders who is chief spokesperson for the anti-shorting Baloney Brigade. The posts in question can be found in Yahoo on the message board for Overstock, Inc., beginning here.

What's remarkable about this dialogue is a couple of things.

The first is that the spokesman for the anti-naked-shorting movement, who irresponsibly throws around terminology like "fraud" and "stock counterfeiting," clearly has no idea of what he is talking about.

The second is that it is great to see an ordinary Internet mesage-poster taking on these snake oil salesmen. Investors can and should fight back, not just against the cynical con artists of the Baloney Brigade, but against all the other forces on the Street that make Wall Street unfair to investors. Hopefully the next time the SEC takes on short-selling, there will be a variety of voices of real investors to speak common sense to regulators.

As some forms of naked shorting are permitted under SEC rules and regulations those persons doing so have no intent to defraud. Thus Mr. Deeds claim falls on point #3.

Giving ["O'Brien"] the benefit of the doubt and assuming that he didn't really mean to say that naked shorting is fraud but rather intended to say that naked shorting contrary to SEC rules and regulations is fraud let's continue.

Who is the victim of this fraud? ["O'Brien"] hasn't identified a victim, certainly fraud requires a victim, so I will again make as assumption, that ["O'Brien"] believes the purchaser of the stock is the victim.

What is the alleged victim's damages if the seller of stock does not deliver the shares by the settlement date? ["O'Brien"] hasn't identified the damages and I don't see any damages. Indeed the blissfully ignorant "victim" of a naked short is able to sell their shares at full market price at any time after the settlement date (or even before if his broker permits). ["O'Brien"] claim of fraud therefore fails on point #5.

As all elements of fraud must be proven, it is sufficient to show that one is not met in order to dispense with the claim of fraud.

I welcome ["O'Brien"] to provide a more compelling proof of fraud as opposed to merely asserting it.

The victim of illegal naked short selling (versus the legal, SEC-sanctioned version) - what I maintain is fraud - is the purchaser, who does not receive the legitimate right to vote that his purchase should have gotten him. He also does not receive the right to sue the company as a shareholder in a class action suit, as he is not a shareholder. He does not receive transfer of record ownership, as rule 17A mandates. The value of voting rights and legitimate right to legal redress as a shareholder are a matter for a jury to decide.

Please explain how advertising something for sale, having the buyer's money removed from his account, and then failing to deliver the product is NOT fraud, if it is done with intent as part of a trading strategy.

The argument that because there is a liquid and ready market for fraudulently created pseudo-shares (indistinguishable in the system as legitimate shares) that there is no damage is specious. It is akin to arguing that because there is a liquid and ready market for counterfeit watches that nobody is harmed when they are traded as real.

I would suggest that you continue this at Thesanitycheck.com as I won't be on this board much over the weekend - other things to do.

That until you can show actual hard cash damages for being defrauded out of your cash, there is not damage, as there is a ready market for the fraud to be resold.

Try this: If you don't want to be guilty as an accessory to fraud, acting in good faith, you can't sell your share, thus you lost the entire amount in terms of liquidity, or risk being a party to a fraud.

'Try this: If you don't want to be guilty as an accessory to fraud, acting in good faith, you can't sell your share, thus you lost the entire amount in terms of liquidity, or risk being a party to a fraud.

Let the jury decide. There's the damage.'

This is circular logic ["O'Brien"] and a case doesn't reach a jury merely because an assertion of fraud has been made. You won't find a judge buying the argument that someone is afraid that they might be participating in a fraud if they sell stock in their account just like millions of people do every day and therefore they are damaged. Someone with this complex is likely damaged but not by the person who sold them the stock.

You might as well argue that the seller of an automobile has defrauded you because after you purchased it you learned from a website that car titles mean the government actually owns the car and therefore you can't sell it.

Being illogical or unreasonable does not make you a victim of fraud, it just means that you are illogical or unreasonable.

Thank you for your time

Posted as a reply to: Msg 62651 by easter_bunny_d3 ["Bob O'Brien")

[End of diaogue excerpt]

UPDATE: The dialogue continues, and now discusses the "stock counterfeiting" canard:

That is the point. If the genuine share has not been delivered, when they sell something, what is ISN'T is stock. It has not voting rights, no right to legal redress, and it is not authorized by the company as a share.

I would argue that a facsimile that is represented by a party as the genuine article (in a sale) to another party is participating in counterfeiting, or in trafficing in counterfeit goods.

Whether there is a ready market that treats counterfeits as genuine is immaterial to the central point: is the item a genuine article, or is it something else - a marker, and IOU, a placeholder?

We know it isn't a genuine article, as it is an FTD. Thus, by selling this "non-share" you would be technically guilty of passing off counterfeits, would you not?

If you pass counterfeit bills once you discover they are counterfeits, is that good? Especially if you are 100% depending upon the idea that the next person won't discover it?

That is what we are talking about, thus, holding that belief, anyone who receives and FTD has been defrauded - they cannot sell it, in good conscience, as they know it is not genuine (it is a counterfeit), thus it is worthless to them as a negotiable instrument, thus they have been defrauded.

Now, your argument is in fact circular - that because many people pass counterfeit bills every day, being worried about it is silly. I don't know - I believe that if you learn you are a party to traffic in counterfeit goods, you should avoid doing so from that point on. The "millions who don't know they are dealing with counterfeits do it, thus it must be OK" argument is specious. Millions of people may well do all sorts of things that violate the law - millions drive drunk, millions take drugs, millions cheat on their taxes. Do they get a "get out of jail free" card when caught?

Look up the definition of counterfeiting, and of trading in counterfeits. Class B Felony, I believe. Your assurances that because everyone is doing it, don't worry, be happy is difficult to reconcile.

"That is the point. If the genuine share has not been delivered, when they sell something, what is ISN'T is stock. It has not voting rights, no right to legal redress, and it is not authorized by the company as a share.'"

They are selling stock, they may be failing to deliver in a timely manner.

The buyer is still entitled to the stock and the seller is still obligated to deliver it.

Unless you can present a case where a shareholder was denied participation in the class due to an inability to prove that the shares represented to be in their brokerage account were 'real shares' your argument has no legal basis.

'I would argue that a facsimile that is represented by a party as the genuine article (in a sale) to another party is participating in counterfeiting, or in trafficing in counterfeit goods.'

You can argue any way you like ["O'Brien"] but your arguments have no legal basis. Naked short sellers don't deliver in a timely manner. There is a difference between not delivering and delivering a 'counterfeit' product.

As the remainder of your message continued the theme of an FTD being a counterfeit good, it can reasonably be discarded as being based on a legal fallacy.

I hear your statement - but again, once the FTD goes into the customer account and is represented to the buyer as being a share - what is that "thing" - that electronic representation?

And when that buyer sells that "thing" to another buyer, what is being represented as being sold? If it is a share, and yet there is no share delivered to make it a share, WHAT DO YOU CALL REPRESENTING SOMETHING AS A SECURITY FOR THE PURPOSES OF SELLING IT, and yet it isn't a security?

Huh.

18 USC section 514 says that it is illegal to create a security or transfer something that pretends to be a security.

And yet you say "everyone is doing it", and "nobody is enforcing that law WRT securities, thus it is OK."

"'I hear your statement - but again, once the FTD goes into the customer account and is represented to the buyer as being a share - what is that "thing" - that electronic representation?'"

And FTD does not go 'into the customers account'. A failure to deliver means the trade was not settled. The settlement failure is not tied to any customer's account.

Thank you for your time.

[end of dialogue]

By the end of the day "O'Brien" threw in the towel, refusing to debate any further on Yahoo and "moved" the discussion to his website -- where he controls the discussion, censors opposing points of view, and posts under multiple identities to congratulate himself on his superb debating skills.

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